Is EMVision Medical Devices (ASX:EMV) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that EMVision Medical Devices Ltd (ASX:EMV) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for EMVision Medical Devices

How Much Debt Does EMVision Medical Devices Carry?

As you can see below, at the end of June 2023, EMVision Medical Devices had AU$2.50m of debt, up from none a year ago. Click the image for more detail. But it also has AU$9.97m in cash to offset that, meaning it has AU$7.47m net cash.

How Strong Is EMVision Medical Devices' Balance Sheet?

According to the last reported balance sheet, EMVision Medical Devices had liabilities of AU$6.04m due within 12 months, and liabilities of AU$365.9k due beyond 12 months. On the other hand, it had cash of AU$9.97m and AU$69.9k worth of receivables due within a year. So it can boast AU$3.64m more liquid assets than total liabilities.

This surplus suggests that EMVision Medical Devices has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that EMVision Medical Devices has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine EMVision Medical Devices's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year EMVision Medical Devices wasn't profitable at an EBIT level, but managed to grow its revenue by 60%, to AU$7.0m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is EMVision Medical Devices?

Although EMVision Medical Devices had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$647k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 60% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for EMVision Medical Devices (of which 1 is significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.